Q: What sorts of hedge fund strategies are you currently managing under UCITS?
A: We were quite late to UCITS. We launched the first UCITS fund, which is a clone of Capella, a European long/short fund, back in January 2009. That fund is now at $850 million. We have a UK large cap fund which is a clone of Octanis which we launched in Q3 of 2009 which has $700 million in AUM, and then we have two recent launches: Japan long/short equity, which is very small, at $100 million, and then we have a European brokers’ best ideas fund which we’ve just launched.
Q: Is launching a UCITS hedge fund a straightforward process?
A: Of course the first launch is always difficult, but what makes it easier for Gartmore and for the portfolio managers, unlike some other funds, is that we do just good old-fashioned equities. We are fundamental stock pickers. What we do in the hedge fund world is very portable in terms of what we do in UCITS. It really is true replication in terms of strategy, 100%. We don’t trade any fancy derivatives, there’s no optionality, it’s all CFDs and futures, it’s super liquid; this essentially means we can trade the portfolios on a daily basis. There’s no mismatch in the liquidity terms and in the underlying portfolio.
Q: Are you effectively re-offering your offshore products, and is that a good or bad idea?
A: We’re very conscious of that factor. If we take a step back and look at the rationale for launching UCITS products, I guess there were two key factors here. The first was that the hedge fund book was effectively wiped out in 2008 because of our liquidity, despite the fact that we had very good long term performance. When the liquidity call came, they came knocking at the door of Gartmore because we are 30 days monthly liquidity. We needed to diversify the business from a commercial perspective. The second and more important factor was that our retail investors were demanding that they have access to Capella which they could not get via a Cayman Island fund that only traded on a monthly basis. We’ve set about creating two different pools of capital; there is no replication from an investor base perspective. All of our UCITS funds, or a very large proportion of them, are deep retail. We do have some very high quality UCITS funds of funds, but we cap them in terms of their exposure to the funds. They can’t have the same concentration levels as investors in our hedge funds would have. We have zero institutional investors in our UCITS funds.
Q: Do you think that will change?
A: No, we haven’t seen the demand. Our institutional investors still prefer the hedge funds, as they know they are shoulder to shoulder with the other investors in the funds. They have similar desires, similar timescales, and they have access to the PMs of the hedge funds, which quite frankly our UCITS investors do not get. You do not get bespoke reporting, none of the bells and whistles that our hedge fund investors get.
Q: Are you worried that UCITS funds will bring more fee pressure onto your hedge funds range at Gartmore and onto the industry more generally?
A: For the industry in general, possibly yes. However, for Gartmore specifically no, as we charge, and have always charged 1.5 and 20%. Investors appreciated our ‘good behaviour’ in 2008 when we returned capital back to hedge fund investors without question. We have never put the gates up, side-pocketed or otherwise delayed returning capital; our funds are perfectly aligned in terms of the liquidity match up and this is indicative of strong, efficient management. Not all firms can say the same. We treat our hedge fund investors as business partners.
Q: How much of a role does investor demand play in your product development thinking?
A: We only do equity long/short; it’s vanilla, and as straightforward as one could possibly hope for. We have very low gross, a very low net on a beta-adjusted basis, it’s close to zero. All of the funds we have launched in UCITS format are our flagship funds. They have a very long history of delivering very strong risk-adjusted returns through multiple market conditions. They’re not loaded up with beta. They share very similar characteristics. We feel that type of approach is very appropriate for the retail market. Some of our others funds are willing to take more directionality, more volatility, and do not have the same downside protection mechanisms. We don’t think they’re suitable for UCITS at the moment.
Q: Do you think Gartmore will ever be able to partner with other managers to access retail distribution networks as you have done historically in the institutional market?
A: The important point here is that we are an investment firm with some distribution capability. We are not a distribution firm with some investment capability.
Q: Does having a distribution network give you an edge and do you see yourselves competing as a distributor of UCITS hedge funds, or are you really just focused on delivering performance to investors?
A: First and foremost we have to deliver performance for our investors. The way I would look at UCITS over the course of the last 16 months is that it is a new relationship. It feels like a new girlfriend you’re trying to court. You dress up well, you treat her with respect, and everything is very rosy. Hedge funds tend to be that longer term relationship. There is a risk here that given all the governance and the regulatory factors that oversee the UCITS space, problems can still arise. Remember the split cap debacle in the 1990s – you had the crème de la crème of the product providers structuring good product and then there was so much demand that they were just throwing product at the market. I don’t think we’ve hit that level yet, but it has to be a consideration. In the UCITS world at the moment, if you take a football analogy, we have the Brazils, the Spains, the Argentinas of the hedge fund world that have done things with UCITS, but I just worry that at some point, when England enter the UCITS forum and we see all the euphoria and press that make us believe these guys are true stars, that they’re world beaters and performance will be incredible, and then of course comes the big let down. What is important here is that if investors continue to do their due diligence properly, in an efficient manner, then if we were to take a look at the England team in this analogy, long term performance would be absolute rubbish, medium term performance okay, and short term performance is diabolical. That could be a problem for regulators and for UCITS performance going forwards.
Q: Why have you favoured launching your own UCITS funds rather than allying with one of the existing platforms?
A: In a nutshell, we have better distribution than the platforms. We also like to know who our investors are so that we are in control of our own destiny so to speak.
Q: Do you think there is a UCITS barrier to entry, that the costs associated with launching a product of this type are too high for smaller, more boutique managers?
A: That is where the platform provider comes in. The boutique gives up a chunk of the revenue for distribution, operational and regulatory expertise. Otherwise, yes, it could be onerous from a cost and hassle perspective for the smaller boutiques.
Q: Do you think that UCITS structures compromise managerial style in any way?
A: If you speak to any UCITS funds of funds out there at the moment – and there are some very, very successful firms in the space that have done a terrific job, with very, very limited choice, then it is clearly a problem. We at Gartmore would never dream of doing a carve-out and saying that 70% of a strategy could be done in a UCITS, but the other 30% would be missing. We believe experience is omnipotent in these challenging markets. We don’t want a paper track record. If you look at the funds we’ve moved into the UCITS world, Capella has 11 years, Japan long/short has eight years, UK large cap has seven years. Those strategies are replicated 100%, completely correlated with no choppiness in terms of the return profiles. We don’t leverage the funds, gross is very low. For other firms there may be a need to engineer a strategy out of a hedge fund into a UCITS formula that works, but that is quite difficult because then you get problems with repeatability in terms of performance, track record, and that to me causes problems.
Q: Are there any Gartmore funds you think might be unsuitable for UCITS, and if so, why?
A: From a structural standpoint, the answer is no. We can replicate all our hedge fund strategies in UCITS. However, we are not in the UCITS space to gather assets, we are here to deliver strong, risk-adjusted absolute returns to retail investors that require a slightly different, more sophisticated approach to saving and investing. UCITS is evolving quickly but it is still very new to the mainstream investors. At this point in time we do not want to do anything in UCITS that could be considered volatile, or overly directional.
Q: UCITS are European, but there is a substantial amount of purchase of the brand name from around the world. Do you think this will continue and build on the hedge fund side?
A: The honest answer is we don’t see demand outside of Europe. We’ve had a few conversations with US interested parties. When you talk to US investors about this they see the liquidity as a negative, whereas in Europe they view the liquidity as a positive. In terms of diversification on a geographical basis, there is literally zero interest from Asia, zero interest from the Middle East, same in the US, although there is the potential for that to grow out. All of our interest comes from our European investors, which we have SICAVs for, and obviously our UK investors which we offer OEICs for.
Q: How does your investment base therefore break down between UCITS and traditional hedge funds?
A: We have three types of investors: the deep retail investing wholly in UCITS product; the new phenomena of the UCITS fund of funds, also investing in the UCITS products; and then we have the hedge fund book of business. We prohibit hedge fund investors from investing in UCITS products. This avoids any cannibalisation. I simply do not see why Mrs Smith in Manchester with her ISA invested in one of our UCITS products would want to invest in a fund that offers daily liquidity alongside a US giant pension plan with $200 million in the same fund.
Similarly, on the hedge fund side, I don’t see why that pension fund client would want 5000 retail investors with them, shoulder-to-shoulder, because quite frankly their interests are not aligned.
